Gains from GST in India, and what still remains to be done

 

The top gains from the GST reforms have been the following

1) Revenue collections improvement – GST collection has grown by a healthy above-GDP growth % in the post-Covid year [1] (Rao G. , 2022).

2) Reduced cascading affect - The integration of CST, Octroi, luxury tax etc into GST has minimized the potential of cascading from these taxes, as was the case during the VAT regime.

3) Enforcement cost optimization – Unification of taxes has also helped reduce administration and compliance costs. Another important outcome of enforcement cost optimization, is how it reduces the chances of a race to the bottom by states, for attracting investments through offering all kinds of concessions.

4) Productivity gains - The elimination of inter-state check posts has enabled seamless movements of goods[2].

5) Competitive federalism – Destination-based GST has reduced inter-state distortions, and incentivized states to create their own manufacturing and services hubs.

6) Uniqueness of the GST Council - Which is the first of its kind negotiation and bargaining platform for inter-governmental co-ordination and conflict resolution.

The additional measures required to reap the optimal gains are explained in the table below –

#	Evaluation metric	Elements of a good GST	India’s implemented GST	Looking forward reform measures needed
Core structure and framework of GST
1	Threshold levels	High- To focus on “whales”, and not “minnows”	Low – with different for product & services (Keen & Mintz, 2004)	Make threshold uniform for products & services [1]
2	Multiple rates	Ideally One [2]	Multiple (5+, increasing chances of mis-interpretation & mis-classification)	Reduce to 2, and eventually settle down at just 1
3	Uniformity	Uniform across states	Mostly uniform across states	Continue the progressive approach
4	Objectives driven by	Revenue and compliance increase	Inflation component also added	Revenue productivity to be activated
Inclusion and exclusion challenges
5	“Sin” and “de-merits” goods (Vanita, 2018)	Not put in high GST slabs	Many in the highest 28% slab	Address through separate sumptuary excise
6	Exemptions et al	Without exemptions, rebates or deductions	Multiple such variations	Address through cash transfers
7	Agriculture income	Included	Excluded	Add medium & high net worth farmers in the net
8	Informal economy	Included by broadening the base of GST	Many exclusions in-built	Reduction in rates and marginal rate, will enable broadening
9	Inflation-basket	Wide coverage	50% not covered (petrol, alcohol, doctors, lawyers etc)	Phase-wise inclusion of these items
Administration, management and compliance reforms
10	Tech-usage (Pandey, 2020)	Tech-driven for analytics and user interface	Tech-platform is just now stabilising 5-6 years after launch	Simplify analytics for large tax payers, invoice-matching for a limited group & linkage with ITR
11	Transparency	Data available for researchers	Opaqueness in the system	Encourage sharing of info with experts to validate the outcomes
12	Tax sharing with states (Shukla, 2021)	Clearly defined, unconditional and prompt	Tax-sharing issues arose due to Covid, from 2020	To manage fiscal concerns via budgetary means primarily

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Bibliography -

Keen, M., & Mintz, J. (2004). The optimal threshold for a value-added tax. Journal of Public Economics (Volume 88, Issue 3-4), 559-576.

Pandey, S. (2020). 3 Years of GST Implementation in India: A State-Level Performance Analysis . Journal of Research in Humanities and Social Science Volume 8, Issue 10 , 41-51.

Rao, G. (2022). Goods and Services Tax in India: A Stocktaking. In D.K.Srivastava, & K.R.Shanmugam, India's contemporary macro-economic themes (pp. 183-206). Springer.

Rao, M. G. (2020). Goods and Services Tax in India: Progress, Performance and Prospects. Indian Economic Summit (pp. 1-40). New York: School of International and Public Affairs, Columbia University.

Rao, M. G. (2022). Evolving Issues and Future Directions in GST Reform in India. Madras School of Economics Working Papers 2022-221.

Shukla, A. (2021, June 27). The New Indian Express. Retrieved from https://www.newindianexpress.com/: https://www.newindianexpress.com/

Vanita, K. (2018, December 07). CorpBiz. Retrieved from https://corpbiz.io/: https://corpbiz.io/learning/gst-india-differs-gst-countries/

 

End note -

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[1] Post-GST trend of revenue collection has seen a positive buoyancy of 1.51 and 1.41 in both the post-Covid years

[2] A PIT coverage of govt. release from 2017 confirms that the long-distance travel time for trucks has reduced by 20% within a year of GST’s applicability (PTI, 2017).

[3] Multiple studies highlighted in reference have confirmed that Rs 50 lakhs is a decent uniform product & services threshold for GST

[4] 86% of the countries that have implemented GST, have done it in a single tax rate slab